An Introduction To Complementary Currencies

In communities around the world, people have come up with alternatives to the usual way of paying for goods and services. Instead of yen, pounds or dollars, they are using privately developed substitutes called complementary currencies. Tutorial:Introduction To The Federal Reserve

What Are Complementary Currencies?A complementary currency is a medium of exchange that functions alongside a national currency, to fulfill a need that the national currency seemingly does not. According to the "International Journal of Community Currency Research," community and complementary currency systems have four main purposes:

To promote local economic development

To build social capital

To nurture more sustainable lifestyles

To meet needs that mainstream money does not

Complementary currencies are not legal tender, only government-issued money has this status in many countries, including the United States, England and the eurozone countries. Legal tender is the only currency that must be accepted to satisfy a debt, in countries with legal tender laws. However, the parties to a transaction can mutually agree to do business with another payment form.

Complementary currencies are thus legal, as long as they meet certain requirements. Businesses that earn them are generally required to count them as income for tax purposes. Also, complementary currencies are not allowed to look like the national currency. Bernard von NotHaus was convicted of counterfeiting in 2011, for his liberty dollars, which the U.S. government said looked too similar to government-issued money.

HistoryComplementary currencies are not a new idea. They were widely used during the Great Depression and even earlier. According to a May 1993 New York Times article:

"In the Depression, when banks were failing and government payrolls faltered because of lack of revenue, communities all over the United States discovered the practicality of going beyond the official legal tender. Governments, unions, churches and civil groups issued currency certificates that are now collectors' items. Some communities even experimented with new designs: Seattle issued money made of cardboard, and its neighbor Tenino, Washington, produced quarters, half-dollars and dollars of Sitka spruce." (For additional reading, check out the following History of Money articles: From and Currency Wars.)

How Do They Work?The creators and administrators of each complementary currency system determine how the system works. Some local currencies are backed by national currency and can be exchanged 1:1. Others are not backed by national currency and enter circulation when a new business signs up to participate in the program, or when someone contributes an hour of service. To ensure that they retain their value, a complementary currency's paper bills have counterfeit protections, just like national currencies do.

People earn and spend complementary currency like national currency, except that it can only be used in certain locations or in certain economic sectors. Where a complementary currency exists, it will only be accepted by participating local businesses; national retailers do not accept it. Among participating businesses, some only accept partial payments in complementary currencies. One reason for this is the need to pay national currency to suppliers and employees who don't accept the complementary currency.

With some complementary currencies, a percentage of the currency goes toward community grants. At the time someone exchanges national currency for complementary currency, or at the time someone redeems complementary currency for national currency, a percentage, usually 5-10%, is subtracted for the donation.

Who Uses Complementary Currencies?Proponents of community currency generally find shortcomings in the mainstream monetary system. They believe that it's bad for the local community when residents spend their dollars at national chains, because the transactions are impersonal and the money leaves the community. Thus, people who want to support local businesses and people who want to foster a sense of local community use complementary currencies. Also, because goods produced locally for local consumption don't have to be transported long distances for sale, environmentalists who want to reduce their carbon footprint also support complementary currency systems.

In the case of time-dollar systems, where people exchange hours of work, complementary currencies seem to help people who have been marginalized by the mainstream economy - people who have had trouble finding a job or starting a business to earn income.

Overview of Widely Used Complementary CurrenciesThere are dozens, if not hundreds, of complementary currencies in use around the world. The United States, Germany and Australia appear to have the greatest number of complementary currencies. Here is an overview of a few of these systems and how they work.

BerkSharesBerkShares are a local currency used in the Berkshire region of Massachusetts, backed by U.S. dollars. Consumers only need to exchange 95 cents of national currency to receive one BerkShare, therefore consumers effectively receive a 5% discount on local purchases made in BerkShares.

Lewes PoundThe Lewes Pound is local currency used in Lewes, East Sussex, United Kingdom, backed by the pound sterling. Individuals receive 95% of the value of the British pounds they exchange for Lewes pounds; the other 5% goes to community grants.

Toronto DollarsToronto dollars are a local currency used in Toronto, Canada, primarily in the St. Lawrence Market and Gerard Square areas; they are backed by the Canadian dollar. Individuals receive one Toronto dollar for every Canadian dollar they exchange, but businesses only receive 90 cents for every Toronto dollar they redeem. The other 10% goes to community grants.

Salt Spring DollarsSalt Spring dollars are used on Salt Spring Island, British Columbia, and are backed by the Canadian dollar. They are a rare example of a local currency with near universal acceptance, meaning that most businesses on the island accept it. These include hotels and inns, art galleries, grocery stores, restaurants, bakeries, retail stores and service businesses.

Ithaca HOURSUsed in Ithaca, N.Y., and founded in 1991, Ithaca HOURS are the "oldest and largest local currency system in the U.S.," according to the organization that runs the system. This complementary currency system is not as straightforward as many others, in that one Ithaca HOUR equals one hour of basic labor or $10.00. Hours are issued as paper currency. Individuals and businesses have to join the Ithaca HOURS system, to be able to use the currency. Members can receive zero-interest business loans on a one-year repayment schedule. (For more on time and money, read Understanding The Time Value Of Money.)

Dane County Time BankThe Dane County Time Bank operates a currency represented by TimeBank Hours, but it's a different type of hour than the Ithaca Hour. TimeBank hours represent hours of service and they are not taxable because they have no monetary equivalent.

Fureai KippuThe fureai kippu (sometimes spelled hureai kippu) is a type of sectoral currency based on hours of service that is used in Japan to provide health care to the elderly and disabled. Individuals who spend an hour helping someone who needs it, bank an hour of service that they can spend to acquire help for a loved one or hang onto until they need help themselves. The system facilitates providing health care for family members who live far away. No money is exchanged.

Frequent Flier MilesFrequent flier miles are a type of complementary currency that nearly everyone is familiar with. They are also a type of sectoral currency, because they are generally only redeemable for costs associated with travel; plane fare, car rentals and hotel stays, for example. Frequent flier miles, like community currency, are only accepted by participating businesses.

ShortcomingsComplementary currencies have some shortcomings. For currencies that are backed by the national currency, a carelessly or fraudulently managed system can cause members to lose money and cause the complementary currency to become worthless. The HollanDollars currency of Holland, Michigan, experienced a problem with its community currency in March 2009. According to the Holland Sentinel, the company that managed the program, CertifiChecks, went out of business and the $108,000 U.S. dollars that backed HollanDollars disappeared. The Holland Chamber of Commerce decided to make up the shortfall.

Another problem is that because national currency already exists as a universally accepted medium of exchange, individuals and businesses that don't subscribe to the philosophy underlying a particular complementary currency aren't likely to want to participate. Also, people need to be taught how complementary currencies work, and for businesses, complementary currencies complicate bookkeeping procedures.

If enough businesses and individuals aren't interested in participating, the currency may not catch on. Even when a complementary currency does catch on, there's no guarantee that it will stay that way, as proponents of Ithaca HOURS have learned. The increasing popularity of electronic payment systems, combined with the currency's founder moving out of town, led to a decline in the HOURS' popularity. It still exists, however, and members are trying to revive it.

The Bottom LineIt's unclear whether the economic premise behind complementary currencies is sound. There are different schools of economic thought, some of which are diametrically opposed to each other, and all of them think that they are right. Nonetheless, users of complementary currencies seem to perceive both financial and social benefits from their experiences with these unique media of exchange, and since participation in a complementary currency system is voluntary, there's no harm to those who disagree.